California Secretary of State Kevin Shelley is seen at his home Thursday, July 10, 2003, in San Francisco. Shelley ran for office a year ago on a platform of fixing faulty voting machines and boosting statewide voter turnout. But with a recall election against Democratic Gov. Gray Davis a growing possibility, the Democrat finds himself at the center of a political firestorm not seen since the 2000 presidential vote count in Florida. (Photo/Ben Margot), Also ran 9/13/03 cAT w/BALLOTS13 jump less

California Secretary of State Kevin Shelley is seen at his home Thursday, July 10, 2003, in San Francisco. Shelley ran for office a year ago on a platform of fixing faulty voting machines and boosting statewide ... more

Photo: BEN MARGOT

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The San Francisco Neighbor's Recouce Center is may be spending money in a suspicious manner.
MIKE KEPKA/The Chronicle

The San Francisco Neighbor's Recouce Center is may be spending money in a suspicious manner.
MIKE KEPKA/The Chronicle

Photo: MIKE KEPKA

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Secretary of State Shelley received dubious donations / S.F. nonprofit that got big state grant brokered by politician is linked to sources who gave $100,000 to his campaign

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A San Francisco nonprofit group paid $108,000 from a state grant to two individuals and two companies who then made donations of nearly identical amounts to Kevin Shelley's successful 2002 campaign for California secretary of state.

The money came from a $500,000 taxpayer-financed grant that Shelley himself arranged in 2000 when he was majority leader in the Assembly.

The state awarded the grant to the San Francisco Neighbors Resource Center, a nonprofit organization founded to serve Asian immigrants by Julie Lee, a Shelley political ally who is also president of the city's Housing Authority commission.

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The money was earmarked to pay for construction of a community center in the Sunset District, but the center was never built.

The donations to Shelley's campaign appear to raise questions about possible violations of state and federal laws. Under the state Political Reform Act, it is illegal to hide the true source of campaign contributions by channeling money through other donors. Under state law, it is illegal to use taxpayer money for political campaigns. Federal law also prohibits charities with tax-exempt status, like the center, from contributing to political campaigns.

-- In May 2001, the state Department of Parks and Recreation released $492,500 of the $500,000 grant to reimburse Lee's nonprofit center for construction-related work after accepting minimal -- and inaccurate -- documentation that the work had been completed as required by law, according to government records and interviews.

-- Between September 2001 and October 2002, Lee wrote five checks totaling $108,000 to two people and two companies for "project management," "consultant services" and "development fees," according to a memo and a record of the bank transactions obtained from the state controller's office under the California Public Records Act.

-- State campaign finance records show the recipients of those payments made donations of similar amounts to Shelley's secretary of state campaign fund within weeks -- and in one case, two days -- of receiving the money. Those donations totaled $100,000.

In a statement Friday, Shelley said: "If this sequence of events is true, very frankly I'm disappointed and more than outraged. I don't know what, if any, inappropriate behavior was engaged in by individual donors to my campaign, but I intend to find out.

"I expect each and every one of my donors to participate in the political process in an above-board manner. If any contributions to my campaign prove to be inappropriate, we'll return the money immediately. I'm especially concerned if any public funds have been misused in any way for political purposes."

In a written statement Lee delivered to The Chronicle, she said she was "very busy with my schedule. I will be out of town and will not be able to meet you before your deadline." Lee also delivered a set of architectural plans for a child and senior day care center at the resource center.

Lee, 57, who emigrated from Hong Kong in 1969, runs a real estate and financial services business with her husband, Shing-Kit. Lee became a vocal force in city politics in 1997, after rallying west-side Chinese Americans to support a local ballot measure favoring a retrofit and restoration of the earthquake-damaged Central Freeway.

Lee co-founded the San Francisco Neighbors Association to represent the interests of small businesses and property owners in the Sunset, Richmond and West of Twin Peaks neighborhoods. She also produces a Cantonese AM radio broadcast weeknights, appearing on the air once or twice a week to promote her conservative views on politics, education and other issues of interest to Chinese Americans -- and to blast her enemies.

In 1999, then-Mayor Willie Brown named Lee to the city commission that oversees the San Francisco Housing Authority, the agency that manages millions of dollars in low-income housing projects and operates federal housing assistance programs. She was elected president of the commission last fall.

Kevin Shelley, the son of Jack Shelley -- a former U.S. congressman and San Francisco mayor -- grew up in the city's Glen Park neighborhood.

Shelley, 48, attended St. Ignatius College Preparatory in the heart of the city's west side before obtaining degrees in political science and law from UC Davis and Hastings College of the Law, respectively.

In 1990, he won election to the San Francisco Board of Supervisors, where he served two terms as board president. In 1996, he was elected state assemblyman; he served three terms, representing west-side San Franciscans in the Legislature and rising to the post of Assembly majority leader.

During his tenure as assemblyman, Shelley endorsed Lee's 1997 campaign for the Central Freeway, viewed as a vital transportation artery by west-side merchants and residents but an eyesore by others.

In August 1999, Lee incorporated the San Francisco Neighbors Resource Center and negotiated a deal with the city to rent an old Fire Department property at 2350 19th Ave. for $1 per year, contingent on the nonprofit providing benefit to the public.

Starting in 2000, the center provided limited information hot line services to immigrants and hosted two environmental fairs and one health fair. However, neighbors recall the center was rarely open for public use.

Lee planned to convert a concrete yard and small offices into a $2.5 million, four-story community center with child care and a multilingual referral service, according to various filings at the city Planning Department, Real Estate Division and Department of Children, Youth and Their Families.

In his 2000 campaign for the state Assembly, Shelley highlighted the grant as one of his legislative accomplishments in a biography posted at Smartvoter.org, a project of the League of Women Voters of California Education Fund. Information on the site is provided by candidates. According to the site, Shelley's campaign posted the information on Oct. 16, 2000.

In May 2001, the Neighbors Resource Center received a check for $492,500 from the state and deposited the money in its account at National American Bank, according to records obtained by The Chronicle from the state controller's office. That amount represented the half-million-dollar grant, minus the state's administrative costs. The nonprofit made no other deposits to that account.

Documents show that a total of $209,686.76 has been spent from the account in the three years since the grant was issued, according to the record of bank account activity.

The nonprofit spent some of the money on construction-related activities. For example, the nonprofit paid John Carver Consulting $1,700 for an environmental assessment, which is on file at the city Planning Department. Engineer James Li was paid an $8,515 fee to reimburse him for a February 2002 payment he made to the Planning Department to start a file for the project, records show.

The Planning Department closed the file two years later, because the nonprofit never furnished proof it had legal authorization from the Fire Department, which owns the property, to build on it.

Slightly more than half the money disbursed from the account -- $108, 000 -- was paid in five checks made out to companies or individuals who, in short order, made campaign contributions to Shelley in nearly the same amounts.

The bank told state auditors that each of the checks bore notations in the memo field indicating that they were payment for work on the project -- although at least one of the individuals contacted by The Chronicle said he had done no work related to the construction project.

The nonprofit made two payments totaling $27,000 to Eric Zhu, a real estate agent and onetime outreach worker at the center, for "project management." The first check, dated Sept. 1, 2001, was for $15,000. The second, dated Dec. 1, 2001, was for $12,000.

On Dec. 28, Zhu made a $25,000 donation to Shelley's campaign for secretary of state.

In a telephone interview, Zhu said he never performed any construction- related work for the center. When asked about the $27,000 payment from the center and the contribution to Shelley, he declined further comment and hung up.

On Dec. 1, 2001, the center issued a check for $25,000 to Steve Chen for "project management."

Chen, who described himself in state campaign finance filings as a produce company executive, donated $25,000 to Shelley's campaign on Dec. 28.

Chen did not respond to repeated telephone calls and a hand-delivered letter to his office requesting comment.

On Feb. 8, 2002, the center issued a $26,000 check for "consultant services" to Gemini Advisors, a firm incorporated by attorney Jeffrey Chen. At the time, Chen was the center's chief financial officer. He also had worked closely with Julie Lee in the past on various community issues.

On March 5, Gemini donated $25,000 to Shelley's campaign. Eight days later, Gemini donated $1,000 to Jack O'Connell's successful campaign for state superintendent of public instruction.

After repeated attempts to contact him for comment, Jeffrey Chen responded in an e-mail that he had resigned from the center's board last year. He declined further comment.

On Oct. 30, 2002, the center paid $30,000 in "development fees" to Cabrillo Construction Co., incorporated by Ruo Wu "Joseph" Chen. He is the brother-in-law of Li, the engineer, who provided an estimate the center submitted to receive its state reimbursement. Li has worked with Julie Lee on numerous residential and business projects.

Two days later, on Nov. 1, Cabrillo donated $25,000 to the Shelley campaign. Ruo Wu Chen did not respond to telephone calls or a hand-delivered letter seeking comment.

The three Chens are not related.

In September 2002, Lee and her husband also contributed a combined $20, 000 to Shelley's campaign, though not with checks drawn from the center's account.

There is no record in state finance filings that Zhu, Steve Chen, Gemini Advisors or Cabrillo Construction ever donated to any other state-level political campaign.

Over the past three years, the center's bank account earned $25,621.35 in interest. As of June 27, the account had a balance of $308,434.59.

The payments by the nonprofit center to Zhu, Steve Chen, Gemini Advisors and Cabrillo Construction -- and their subsequent contributions to Shelley's campaign for the secretary of state's office -- came while Shelley was locked in fierce primary and general election battles.

Shelley beat his closest Democratic rival, March Fong Eu, by a margin of less than 5 percentage points in the March 2002 primary, and defeated Republican opponent Keith Olberg by a margin of less than 4 percentage points in the November 2002 general election.

According to campaign finance filings, Shelley raised a total of $2.15 million in 2002 for his secretary of state campaign.

Shortly after Shelley was sworn in January 2003, he hired Julie Lee's son, Andrew Lee, 30, as an aide. From Jan. 31, 2003, through April 2004, he served first as a communications outreach worker and then as an international small business officer for $57,756 per year. He is now on leave and receiving workers' compensation, a spokeswoman said.

Previously, Andrew Lee served as executive director of the Neighbors Resource Center. He was also an aide to Brown before making a failed bid in 2002 for the Sunset District seat in District 4 on the San Francisco Board of Supervisors.

As Shelley's aide, Andrew Lee often represented the secretary of state's office at Asian and Asian American functions. Lee did not respond to repeated telephone calls and e-mails requesting comment.

Documents obtained by The Chronicle also indicate the state Department of Parks and Recreation exercised minimal oversight in disbursing the $492,500 awarded to Lee's community center.

The department is supposed to issue checks to nonprofits as reimbursement only after the organization submits an invoice for work already completed.

Lee's nonprofit submitted a document on the letterhead of San Francisco engineer Li that was labeled an "invoice," but was, in fact, an estimate of the cost of building the center.

Li's document puts the "soft cost" of the community center project at $621,300, for expenses such as permits, architectural plans and building and demolition permit fees.

The bottom of the document states: "Thank you for your business, please pay this amount."

In an interview, Li said the document was an estimate he prepared to apply for city building permits. He said he did not recall labeling the document an invoice.

Auditors in the controller's office who have examined the grant to Lee's nonprofit cited a "possible control deficiency" and raised questions about the department's grant management. In 2001 alone -- the year Lee's grant was issued -- the department oversaw 250 payments totaling more than $110 million.

Charlie Willard, chief officer of grants and local services for the state Department of Parks and Recreation, said in an interview that the department did not follow up on the grant to Lee's nonprofit because the agency was under the impression it was reimbursing the center for money already spent.

In their certification, grant recipients must sign a statement attesting the funds were spent on completed projects and that final payment has been made on all work done.

"They would get money if they sent billing for it, because it allowed us to know how they spent the money," Willard said. The department is now auditing the resource center's grant.

The center's tax filings in 2000, 2001 and 2002 do not report the $492, 500 in grant funding from the state.

Under law, nonprofits must show their revenue and expenses, to prove that their money is being spent on charitable purposes. The incorrect reporting could threaten the center's tax-exempt status.

MONEY TRAIL TO CAMPAIGN FUND

In 2000, as majority leader of the state Assembly, Kevin Shelley sponsored the legislation that led to a $500,000 grant to build Julie Lee'scommunity center in San Franciso's Sunset District. The following explains how the grant was disbursed, who received payment from thenonprofit and when they made contributions to Shelley's 2002 campaign for secretary of state.

KEVIN SHELLEY

Now secretary of state, Shelley is responsible for enforcing California's election laws. He is the son of Jack Shelley, a former U.S. congressman and San Francisco mayor.

JULIE LEE Lee is a San Francisco real estate agent and political powerbroker who founded the San Francisco Neighbors Resource Center in 1999.

ANDREW LEE

Julie Lee's son and former executive director of the center, Lee was hired shortly after Shelley was sworn in as secretary of state in January 2003. Since April, Lee has been on leave from the office, receiving workers' compensation benefits.

SAN FRANCISCO NEIGHBORS RESOURCE CENTER

The state released the grant money to the nonprofit organization to build a community center for Chinese immigrants. Between Sept. 2001 and Oct. 2002, Lee wrote checks to two individuals and two businesses for $108,000 for "project management," "consulting services" and "development fees."

HOW MONEY GOT INTO SHELLEY FUND

State campaign finance records show that soon after receiving a total of $108,000 from the center, the recipients made donations totaling $100,000 to Shelley's secretary of state campaign.

$500,000

GRANT FOR SAN FRANCISCO NEIGHBORS RESOURCE CENTER RECEIVED MAY 2001

PAID For center work

$27,000 Dec. 1, 2001

Eric Zhu is a real estate agent and former outreach worker for the neighborhood center.The nonprofit made two payments to Zhu.

-- First check, dated Sept. 1, 2001, for $15,000.

-- The second, dated Dec. 1, 2001, for $12,000.

DONATED To Shelley campaign

$25,000 Dec. 28, 2001

Zhu makes a contribution to Shelley's campaign for secretary of state.

PAID For center work

$25,000 Dec. 1, 2001

Steve Chen* is a produce company executive.

DONATED To Shelley campaign

$25,000 Dec. 28, 2001

Chen donates the same amount to Shelleys campaign.

PAID For center work

$26,000 Feb. 8, 2002

Gemini Advisors is a business incorporated by Jeffrey Chen*, former chief financial officer for the neighborhood center.

DONATED To Shelley campaign

$25,000 March 5, 2002

Gemini donates nearly the same amount to Shelley's campaign.

PAID For center work

$30,000 Oct. 30, 2002

Cabrillo Construction Company is incorporated by Ruo Wu Joseph Chen*, the brother-in-law of the engineer who provided the estimate that the neighborhood centersubmitted to receive its state reimbursement.

DONATED To Shelley campaign

$25,000 Nov. 1, 2002

Cabrillo almost immediately makes a sizable donation to Shelleys campaign.